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401(k) Committee Chasing Performance

posted on May 11, 2007

I received an e-mail from my employer’s HR department this week announcing some changes to our 401(k) plan. Here’s what they said (emphasis added by me, fund names masked).

The 401(k) Committee decided to remove the ABC Fund from the Plan due to poor performance for several quarters. The committee closely monitors all funds in the plan for the best interest of our plan participants. ABC Fund will be replaced by XYZ Fund. XYZ Fund’s 10-year performance is in the top 10% of its Morningstar category through 12/31/2006.

Wow, the 401(k) Committee is tough and impatient. ABC Fund’s managers had several quarters of poor relative performance and they were fired by the committee! What happened to investing for the long term?

The committee replaced it with XYZ Fund, which had great performance in the last 10 years. Why didn’t the committee choose the XYZ Fund 10 years ago? I’m sure when the committee chose ABC Fund, ABC also had great performance at that time. It didn’t turn out well. Now the committee jumps over to XYZ. Who’s to say it won’t perform poorly for several quarters and get axed again?

This is called driving by the rear view mirror, or performance chasing. The 401(k) committee, with good intentions, picks funds that had good returns. What they really ought to do is picking funds that will have good returns, because what happened in the past does not benefit anybody who didn’t invest in those funds. It’s what happens in the future that counts. Of course the committee is going to say that they can’t predict the future. Then why bother chasing past performance?

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What the 401k committee really “ought” to do is allow you all to invest in some index funds and realize that actively managed funds have repeatedly been shown to under perform their market benchmarks after expenses and trading costs are taken into account…

As a member of my company’s 401k commmittee, I can tell you that the probable reason your 401k committee decides to chase performance is that they are worried about being sued by disgruntled employees… So to prevent a possible law suit for not allowing employees to invest properly, they prevent all employees from investing properly… I mean, clearly, no one can sue them for selecting funds with a better track record… that is the twisted logic that lawyers and frivolous law suits force upon us all.

401k committees are a joke. THey dont need any experience to make decisions for everyone in the company. A broker needs a series 7 license to sell stocks but a 401k committee member can be be a high school dropout.

They dont offer any true diversification, such as real estate funds, TIPS, commodities or anything that would allow true diversification.

And is the market turns against you, dont think you can get out and then back in as you will be branded a serial trader and possibly fired from your job.

So, we live in America where we are supposed to be free, just not free to decide how to invest OUR OWN MONEY.

IRAs and SEPs allow people to choose their investments but 401K members are stuck with idiot committee members picking the funds.

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